Interest Suspension Sparks Speculation

InvestmentNews published an article on Monday about Thompson National Properties' TNP 12 Percent Notes Program, LLC's decision to suspend interest payments for the remainder of 2012.  The article is full of important information, including a quote stating that the notes, which were issued in 2008, have returned 35% of investor capital.  I suspect this is the notes' interest payments, not a return of capital, so investors are still entitled to 100% face value of the notes, as well as any accrued interest, until the notes are repaid.

The name of the company that issued the notes, TNP 12 Percent Notes Program, LLC, signifies to me that it was a special purpose entity formed for the sole purpose of issuing the notes for its capital, and then used the proceeds from the notes as equity to purchase real estate or for other investment purposes.  There is nothing wrong with this structure, as long as there are safeguards for investors / note holders and its complexity is understood.  Because of the structure, any collateral supporting the notes is likely at the issuing company level, not directly at the property or asset level.

Towards the end of the article, the author, Bruce Kelly, writes:

It's important for broker-dealers to understand the structure of such note programs. Pivotal information includes the value on the assets, whether such deals contain an “equity cushion” — meaning the property values is greater than the amount of money raised — and if the debt service on the note is manageable. 

I would add a few other points:

• Does the "suspension" of interest payments constitute an event of default, and what is the default rate of interest?  (I have seen note programs where deferred, skipped or suspended interest payments don't trigger a default for six months, so it's possible that the suspension doesn't immediately put the notes into default.) 
• If the suspension of interest payments didn't trigger a default, what does constitute a default?
• Do the notes have an agent to represent note holders, or are note holders on their own to seek remedy?
• Is there any debt that is senior to the notes?  (This goes to the equity cushion comment above.)
• Are there any affiliated investments and what are these worth? 
• Does the interest payment suspension impact any other TNP entity debt (i.e. negative covenants), including debt in TNP's public non-traded REIT?
• Is the suspension an isolated event or are other TNP entities facing debt problems?

The article has the following paragraphs:

A spokeswoman for Thompson National Properties, Jill Swartz, said Mr. Thompson was traveling Tuesday morning and was not available for an interview. But in an e-mail to InvestmentNews, she wrote that TNP had taken steps to reduce overhead costs and increase revenues. These steps will strengthen the company's finances and benefit thousands of investors, she wrote.

“One of these steps was to defer payments related to the TNP 12% Notes program through the end of 2012,” Ms. Swartz wrote. “We fully intend to pay investors in this program all remaining interest and principal on or prior to the maturity date of June 10, 2013.”

 Let's hope Ms. Swartz is correct.